What is Adani thinking?

A couple of days ago, Gautam Adani made the long awaited announcement that the Adani board had decided to proceed with the Carmichael mine-rail project in the Galilee Basin. As usual there was an asterisk. Construction work won’t start until Adani can get financial backing. This was previously supposed to in June 2017 (that is, within weeks) but has now been deferred until 2018. Still, Adani has opened a head office in Townsville, promises to hire up to 250 staff and is also saying it will begin pre-construction works like land clearing in the September quarter.

But on the same day, unnoticed by almost the entire Australian press, with the exception of Peter Hannam at the SMH, the board of Adani Power, the putative buyer of Carmichael Coal, made a much more consequential decision. They are spinning off the 4GW Ultra Mega Power Plant* at Mundra, along with a huge load of debt, into a subsidiary, provisionally called Adani Power (Mundra). The plan it seems is to sell majority ownership, hopefully to the government of Gujarat, and thereby leave the slimmed down Adani Power with a manageable debt load, while it shifts further away from coal and into renewables.

But without Mundra, Adani Power won’t have nearly enough coal-fired plant to take up the output of even the first stage of Carmichael. And this “mine to plug” model was crucial to the viability of the project. Even if the modest recovery in thermal coal prices over the past year were sustained, Carmichael couldn’t cover its costs by selling on the world market.

So what is Adani up to? I’ve thought about a bunch of hypotheses and now I have one that I think makes sense. Adani doesn’t want to write off the $2 billion or so it’s already put into acquiring the mine site, but it also doesn’t want to throw good money after bad. Suppose that, Adani gets $1 billion in loans from the Turnbull-Canavan Northern Australia slush fund to build the rail line, which is owned by a separate Adani company in the Cayman Islands. They could use that money to get started on the rail line, while discovering yet more reasons not to start spending their own money on the mine.

That would buy them perhaps a couple of years during which something might turn up. The price of coal might go up a lot. abd the Hancock-GVK Alpha project might somehow be revived. If so, the rail line could be viable even without Carmichael.

And, if nothing did turn up, Adani would have bought a couple of years breathing space before writing off the losses that have already been incurred, without spending a significant amount of its own money. Adani (Caymans) would slide gracefully into bankruptcy and the Australian public would be left with a half-built rail line to nowhere and a billion dollar hole in our collective pockets.

Of all the explanations I’ve tried out, this is the one that makes most sense to me right now. Comments appreciated.

* I love this grandiose name, redolent of the great days of Soviet-inspired central planning. The UMPP program was started with great fanfare a decade or so ago, but has now collapsed almost completely.

31 thoughts on “What is Adani thinking?

  1. For a company struggling with financing I have long suspected it is advantageous to have Carmicheal as a future asset rather than a legacy debt.
    If only for appearances in the accounts.

  2. Probably the best scenario, Adani wants to collect the rent from a rail line they didn’t pay for carting stuff other people dug up.

  3. Seems like they are giving themselves some time to set up the Gujarat government with a white elephant generator, before they chuck in the towel here.

  4. Initially the Indian government planned “ultra mega” multi-gigawatt solar farms too, even – insanely – in Ladakh, which consists entirely of high mountains and narrow valleys barely accessible by road. The same Soviet gigantism was at work, in a technology that has next to no economies of scale. These giant plants seem to have been sensibly broken up in practice into sensible projects of a few hundred megawatts. There is something to be said for large solar parks, where the state government guarantees the developers land acquisition, permitting and grid connection.

  5. Why should the state government of Gujarat accept the enormous mangy white elephant on offer? The owners of the much newer Maasvlakte coal power station in Rotterdam have had to write off €700m of its €1.5 bn construction costs. Saddled with the lossmaking PPAs sustained by the Supreme Court, Mundra must be effectively worthless. Presumably Adani has a lot of clout in his home state and some bailout will be achieved. But he wil be very fortunate indeed to escape another large hit.

    I hope that other Indian owners of early-stage coal power projects in India are watching this and getting increasingly worried. A fast exit and cutting losses must look attractive to some.

  6. Another billionaire asking for another billion dollar subsidy. This seems to be the prime way billionaires are made and maintained. Why do so few question this system?

  7. Nick’s right – they are trying to get serious money from taxpayers to cover their debts, but more from Gujarati than Australian ones. This will be done by “negotiating” a long term contract with their wholly owned subsidiary the government of Gujarat – India is not the Netherlands, James. That locks in an extraordinary price for supplying coal to the UMPP.

    The beauty of that from Adani’s POV is that if Carmichael doesn’t go ahead thy can just buy the coal from someone else at the much lower world price and sell it on – they have in practice delinked the UMPP and Carmichael.

  8. I did not say that Gautam Adani is making a monkey out of Annastacia Palaszczuk. I have never said that Gautam Adani is going to make a monkey out of Annastacia Palaszczuk. The word you heard is a word in an Indian regional dialect that means “true principled Labor state-building job creating friend of the workers” that just happens to sound like the English word “monkey”.

  9. Yes there is a tactical game being played here, by both the Adani mob and the Queensland government.
    As pointed out above, Adani is trying to hedge its withdrawal from the project They may even extract some coal before yielding to market forces, sliding to a bankruptcy that leaves taxpayers out of pocket. To that perhaps add serious environmental damage.

    The Queensland government does not want to see another large Northern project slip through its fingers. We lost the 4.5 billion dollar Cairns casino (Tony Fung) and now there is a real chance the Adani project will collapse. That might not be the governments fault but perception counts.

  10. Adani I has interests outside of coal in Queensland. So setting up head quarters is no real consequence other than to keep the idea of the project alive. It is interesting to see the Adani share price rebound on the back of the royalty settlement. A sceptical person could conclude it’s all smoke and mirrors to elevate the share price. Presumably someone stand to gain from the higher price.

  11. @Hendo
    It seems to me that the Adani project would be a good one to lose, particularly if it appears to be someone else’s fault.

  12. Hi David
    Yes I don’t know any informed person who supports the project.

    SO much wrong with this mine I cannot understand why government is so keen to make it happen.

  13. John

    I think you are on the money, but I suspect that the rationale is more immediate than buying time.

    Projects like the mine are a significant asset on Adani Enterprise’s balance sheet (just like Clive Palmer’s illusory wealth, the projects don’t actually need to be happening to any material degree). If Adani call the project off, the project’s worth on the balance sheet is effectively written down to something approaching zero (the rights to the coal are almost worthless in the current market). And I suspect that this would make Adani’s balance sheet pretty close to negative net worth territory. The consequence of this is that Adani will struggle to access capital for projects of any genuine worth.

    So by spending a few million a year on an illusion in Australia, they are keeping the part of Adani that is genuinely viable afloat. Perhaps continuing the illusion is a great investment.

  14. This sounds the most plausible analysis, I know Adani wants our money I know they are in debt to the tune of 2.5 billion dollars, the mine does in no way stack up financially.and all losses will be Bourne by us. The question I ask is why our government is choosing to ignore commonsense and throw away I billion dollars plus the royalty income and the coal all while destroying the very things people come to Australia to see??? The only other eqation that fits as well next to your hypothesis is bribery and corruption by our politicians!!

  15. @derrida derider
    Sure, Gujarat is not the Netherlands. It has three times the population. Forbes lists 10 Gujarati billionaires (including a beautiful single woman entrepreneur active in Thailand, if you are prospecting). Adani obviously has clout in his home state. But it’s not a rotten borough and there must be political limits to what he can get a way with, imposed by voters in Gujarat, the elites in Delhi like the Supreme Court, and rival billionaires.

  16. Where would Hancock GVK Alpha sell its coal, and why couldn’t Adani sell its own coal to that market, wherever it would be?

  17. I’m trying to get a rough handle on the situation of the Adani family. From the IEEFA March report, we have in USD:
    Adani group total equity value in March 2017 $15.4 bn
    of which family stakes $9.4 bn (61%)
    Adani group total debt $15.9bn
    including margin and other loans to family $1.5 bn (and excluding $1.45 bn off-balance-sheet lending to Abbot Point entity)
    Imputed share of all debt to family $10.3 bn.

    Since then, we have the writeoff from the Supreme Court judgement on the Mundra PPAs, lowball estimate $0.5 bn, to family equity $0.3bn. There may be further losses from the partial Mundra selloff, depending on how hard a bargain the state government strikes. The family are probably down to $9bn, subject to share prices. They are leveraged, but not absurdly so – assuming the debts correspond to realizable assets.

    The family could clearly survive another $1.3 bn writeoff of the Carmichael mine ($0.8 bn to family, say 10% of their net wealth). However, the different enterprises in the group have very different balance sheets, and Adani Enterprises is vulnerable. I doubt if Indian bankers have failed to secure cross-default clauses or other guarantees that would prevent the family just cutting one failing enterprise loose.

    Unsurprising conclusion: however the Carmichael mine works out, Gautam Adani will stay a very rich man.

  18. @James Wimberley

    It would be worth looking at where they were 20 years ago. Unheard of at that time if I am not mistaken. Suddenly shot into prominence because of political connections. Everyone in “mining” and “game of mates” seems to do this. Is it surprising?

  19. News item about Queensland:
    “The government of the Australian state has revealed plans to launch reverse auctions this year for as much as 400 MW of renewable energy capacity, in addition to 100 MW of energy storage systems, as part of a new A$1.16 billion ($873.2 million) investment. … The package includes A$150 million to back the construction of a 500 km transmission line between Townsville and Cairns, in order to facilitate the development of a regional clean energy hub.”

    Perhaps Palaszcuk is also playing for time. If the jobs in Townsville are in renewables, she can gradually forget about the imaginary coalmining ones.

  20. “…a regional clean energy hub.”
    Yes one of those was planned a few years back. Called the CopperString Project it linked Townsville to Mt Isa via a series of renewable energy generators – mostly wind and solar but some hydro too I think. Some detail here: http://statedevelopment.qld.gov.au/assessments-and-approvals/copperstring-project.html
    The project stopped when Mt Isa mines decided to build a new gas powered plant. Amazingly they now complain about the cost of gas.
    Here’s the obituary notice for the project: http://www.copperstring.com.au/

    Nice to see some concept stuff out there but…
    Just last week I rang Ergon who said to ring Stanwell who said to ring Powerlink then Energex who said to ring the Dept of Energy. My query to all of them was what was going to happen to our energy supply as renewables got a tighter grip and our coal generator plants wore out from 2025 onward. The answers were underwhelming. Most popular was “Have you looked at our web site?” But it was clear that they had no insight at all. I eventually got a call from a nice policy guy in Brisbane, but he was unable to help.
    No one identified a “clean energy energy hub”, nor the Kidston pumped hydro 300 km west of Townsville. It was clear that these actors, all essential parts of the Queensland grid, had no idea of what was needed or what plans might lurk in the back rooms. I would have been encouraged if told that “…there are plans but we can’t reveal them yet.” But there was no hint that anyone had any idea about our future energy supply.

  21. A variant on the playing for time theory. Gautam Adani would of course like the Qld government to pay him enough billions to make Carmichael profitable. He would also like to be paid lots of compensation if its policy decisions force him to cancel. But you don’t make $9bn by wishful thinking and betting on long shots. I think we should look for some specific reason why he is delaying now. The obvious candidate is the Mundra selloff – a major disinvestment in coal, mind. This is a difficult negotiation and he must not show weakness to pull it off on favourable terms. So I’ll venture a rash prediction: the cancellation will come soon after the Mundra deal is closed.

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